Free Essay On Bigger Than Enron Analysis

The FASB123 and the FASB123R are basically similar policies or standards that account for a company’s stock options offering and compensation procedures. In technical terms, however, they are different because the latter is an updated and revised form of the former. Prior to the existence of the FASB123, company employees (from the Chief Executive Officer down to the rank and file employees for some publicly listed companies) receive equity-related compensations such as the ability and right to purchase stocks of the company for a discounted price (i.e. stock rights) and benefits aside from their basic salaries. The problem with it, however, was that those equity-based compensations were not recorded—at least before the existence of the FASB123. This was a major loophole in the Generally Accepted Accounting Principles (GAAP) and Financial Accounting Standards Board’s (FASB) founding principles which is to protect the public’s interest in establishing and improving the current generation of accounting standards. This loophole allowed many companies to initiate and execute many shady transactions involving millions of dollars of profits and investor money to be smuggled to certain key people’s bank accounts without a trace—because such transactions used to not appear in the mandatory financial reports. The first version of the FASB123 finally put an end to this. However, for some reason, it still had a loophole and so a 2004 and later on a 2009 revision were introduced. The purpose of such revisions was basically to introduce more levels of authoritative GAAP to rearrange the system and make it harder for perpetrators to circumvent the existing regulations. All of the succeeding iterations after the original one were aimed at improving the transparency and accountability in reporting such transactions—pertaining to stock rights offerings within a publicly listed firm.
What Mr. Arthur Andersen meant by the phrase Keepers of the Holy Grail is the importance of the role of the auditors in promoting a healthy and transparent business environment. Basically, auditors have the power to make or break the accounting and financial system in all types of for profit firms. They can either conspire with the company’s executives to hide the company’s debts and make the investors believe that everything is working fine (even though they are not) just like what happened at Enron; or they could also stick with their morals and principles and start doing their job more professionally. Either way, they have a direct control of how a company is going to behave when it comes to financial reporting.
Basically, one side argues that stock options are necessary to retain and attract managerial talent; the other side disagrees. Now, it is true that stock options are an effective tool to lure talented people into a firm; however, it greatly increases the risk of subjecting the company to accounting fraud and corruption especially. When managers want more, they may conspire with the auditors to help them amass unfair stock option and other equity-related benefits without being seen, something which has been done by a lot of firms and managers in the past.
What happened was basically one of the many results of lobbying. From a moral standpoint, the acting chairman of the SEC should have acted against the resolution but since it was done based on votes, he was not able to do anything about it. So, without a concrete framework on how such issues would be resolved, it may well happen again in the future. The only way to prevent it from happening is to introduce strict guidelines that even the senate would not be able to override.
Sunbeam’s case of fraud was a classic example of cooking the books. The auditors’ reporting ability was abused because they were involved in the accounting fraud. The cookie jar reserves and the slush fund were just some of the schemes they used to mask what was really happening to the financial statements the company has submitted. What the auditors can do to prevent these incidents is to simply follow the FASB and GAAP guidelines nothing more and nothing less.
The Fraud at Waste Management involved five years of financial fraud where the defendants (i.e. founder and former top officers of Waste Management Inc.) falsified and misrepresented their firm’s financial results from 1992 to 1997. Again it was a classic case of cooking the books. The scheme was discovered when a new CEO ordered a review of the company’s accounting practices. It all spiraled down from there.
The purpose of the Private Securities Litigation Reform Act was to limit the number of non-serious securities lawsuits. This was done in order to give the regulatory agencies more room to assess more significant and meaningful cases.
Basically, what this new environment created was one that motivated people and businesses to work hard in order to circumvent the existing laws against financial and accounting frauds and misconducts. Consultants exist for that very reason. It is true that the ratification of the SOX was an effective measure to prevent frauds and misconducts in the industry but without proper policing and prosecution, the old practices would be very hard to kill in this industry. What the SOX did at best was to repel perpetrators; however, some still proved to be brave and resourceful enough to circumvent its provisions.
Carl Bass saw what was happening to Enron in 1999 but nobody believed him. It was the whistle blower Sherron Watkins who revealed what was really going on when she published a memo saying Enron could implode at any time in 2001. What Mr. Bass did was to raise concerns about Enron’s accounting standards but he was not courageous enough to act on it and so when it all imploded, he was technically part of the people to blame. One can only guess what the real reason why Andersen and other people who were aware of the ordeal gave in to the senior management of Enron.
The problem with this SOX provision is that it does not equip the law with the means to know whether this inform-the-board thing was actually followed. So it is practically useless. At best, what the SOX did to address concerns brought up in the program Bigger than Enron, was to serve as a bluff against current and future violators of financial and accounting laws and regulations.
A principles-based system is basically one that minimizes the use of rules and maximizes the use of principles. It offers a paradigm shift in assessing violations of GAAP and FASB guidelines. However, for now, it lacks standardization and would most likely produce more chaos than stability in the already complicated world of accounting and financial standards.